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Apple Dispute Hits Chip Maker -- WSJ

Qualcomm Inc. sharply cut its profit forecast, saying it no longer expects any patent-licensing revenue from the iPhone in the current quarter as a result of its increasingly bitter legal battle with Apple Inc.

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The new guidance reduces by a third the high end of the range for Qualcomm's per-share earnings in its current quarter, the company said Friday. Qualcomm cut the low end if its estimate by more than a fifth, and said it expects revenue to be 8% to 9% below its previous forecast.

Shares of Qualcomm slipped 0.2% to $53.12 in afternoon trading.

Qualcomm typically licenses its technology to phone makers directly and doesn't have an agreement with Apple. Instead, iPhones are licensed through Apple's contract manufacturers.

The change in guidance stems from royalties Qualcomm no longer expects to receive from some companies that manufacture the iPhone. Those contract manufacturers have licensing agreements directly with Qualcomm. They have withheld royalties because Apple is refusing to reimburse them amid the legal fight, Qualcomm said.

Qualcomm said Apple informed the San Diego, Calif., chip maker that it would continue to withhold reimbursements from the contract manufacturers on sales in the quarter that ended in March, Qualcomm's Friday statement said. Those underpayments would affect Qualcomm's results in the current quarter, requiring it to change its guidance, it said.

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"We've been trying to reach a licensing agreement with Qualcomm for more than five years but they have refused to negotiate fair terms," an Apple spokesman said in a statement. "Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court."

The development escalates the toll for Qualcomm of a feud that has already helped drive down its share price by more than 15% since Apple sued it in January. That suit claimed Qualcomm was using a monopoly position in cellular chips to impose "onerous, unreasonable and costly" terms on customers and competitors.

Qualcomm has characterized the dispute as a commercial disagreement in which Apple is trying to reduce its costs.

Qualcomm has developed technology deemed essential to cellular communications, and it collects royalties from nearly every smartphone sold world-wide. The company's patent-licensing segment in fiscal 2016 contributed roughly 30% of total revenue but 80% of pretax profit. Apple royalties account for about 12% of Qualcomm's total revenue and as much as 30% of its per-share earnings, estimates Srini Pajjuri of Macquarie Capital (USA) Inc.

Apple said in its suit that it was withholding payments to its contract manufacturers in retaliation for what Apple claimed was Qualcomm's refusal to pay $1 billion it owed Apple under a previous agreement. Qualcomm subsequently said that it expected royalties withheld by the contract manufacturers not to exceed that amount.

In its second-quarter earnings call just last week, Qualcomm said it expected to receive some payments from the contract manufacturers. Its forecasts then -- which already predicted a decline in profit -- reflected a range of possible scenarios for iPhone-related royalty payments, but not one in which no royalties were paid, Qualcomm said. It said it would update its guidance if learned of anything that would materially affect expectations.

But that expectation has changed. "The contract manufacturers may make some form of partial payment, but initial indications are that any payment would likely be insignificant," Qualcomm's Friday statement said.

Qualcomm's revised guidance is for diluted earnings per share of 52 cents to 62 cents, down from a range of 67 cents to 92 cents. The new guidance would mean a drop of a least 36% in profit from the same quarter last year.

Qualcomm said it now expects revenue in the current period of between $4.8 billion and $5.6 billion, down from a range of $5.3 billion to $6.1 billion. Revenue in the same quarter a year ago was $6 billion.